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Public markets, private orderings and corporate governance

  • Pagano, Ugo

In the New Property Rights approach the degree of incompleteness of markets is taken independently of the cost of the public ordering and of their efficiency relatively to private orderings. In this approach "public markets", similarly to a Swiss cheese, are either assumed to be non-existent empty holes (because of infinite third party verification costs) or assumed to be smooth and efficient (because of zero third party verification costs). When we allow for positive but not infinite third party verification costs we are necessarily pushed back to the insights of Commons, Coase, Fuller and Williamson. The degree of (in) completeness of public markets becomes an endogenous economic problem and managers can be seen as agents that make "second order" specific investments to run specific relations that cannot be efficiently run by public markets. Managers and the public authorities build respectively private and public "legal equilibria" that set the working rules within which transactions can take place. Private and public legal equilibria are not only substitutes but also complements. This complementarity is an important source of the path dependency that characterises the development of different legal systems. The framework is applied to GM's acquisition of Fisher Body. We claim that, contrary to the claims of the New Property Rights approach, the advantages of the acquisition cannot be due to the incentives of private property but should be rather related to the replacement of public markets by the new private ordering set up by Alfred Sloan.

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Article provided by Elsevier in its journal International Review of Law and Economics.

Volume (Year): 20 (2000)
Issue (Month): 4 (December)
Pages: 453-477

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Handle: RePEc:eee:irlaec:v:20:y:2000:i:4:p:453-477
Contact details of provider: Web page: http://www.elsevier.com/locate/irle

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  1. Andrei Shleifer, 1998. "State versus Private Ownership," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 133-150, Fall.
  2. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, March.
  3. Ugo Pagano, 1999. "The Origin of Organizational Species," ESRC Centre for Business Research - Working Papers wp118, ESRC Centre for Business Research.
  4. Bengt Holmstrom & John Roberts, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 73-94, Fall.
  5. Williamson, Oliver E, 1994. "Evaluating Coase," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 201-04, Spring.
  6. Fabrizio Barca & Katsuhito Iwai & Ugo Pagano & Sandro Trento, 1998. "The Divergence of the Italian and Japanese Corporate Governance Models: The Role of Institutional Shocks," CIRJE F-Series CIRJE-F-32, CIRJE, Faculty of Economics, University of Tokyo.
  7. Geoffrey M. Hodgson, 1998. "The Approach of Institutional Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 166-192, March.
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